Financial Intelligence Centre Amendment Bill, 2016

Contentious Policy Issues, Resolutions and Implementation

Briefing of the Standing Committee on Finance 20 April 2016

al intelligence centre REPUBLIC OF SOUTH AFRICA

financial intelligence centre

REPUBLIC OF SOUTH AFRICA

Content

1. Reminder of the Bill’s objectives and motivation for amendments

2. Measures to smooth-in implementation

3. Contested policy issues and their resolution

• Definitions

• Record keeping

• Consultations

• Single transactions

• Beneficial ownership

• Additional Ongoing due diligence

• Risk Management and Compliance Programme

• Prominent Influential Persons (PIPs) versus Politically Exposed Persons (PEPs)

4. Closing remarks

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Reminder of the Bill’s objectives and motivation for amendments

• Financial crime remains on the global and local agenda

• International standards on combating financial crime (FATF/UN) have evolved

• Significant gaps in SA’s regulatory system

• Identified by 2009 Financial Action Task Force (FATF) Mutual Evaluation on South Africa

• Implementation of the UNSC Resolutions relating to the freezing of assets

• Compliance with Constitutional Court Decision on non-routine inspections

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Measurers to smooth-in implementation

• Risk-Based Approach versus Rules

– Concern: Bill is too prescriptive and rules-based on certain provisions

– Solution: Relevant provisions will require constant interaction between supervisory bodies and AIs post-enactment (e.g. timeline programme)

• Prominent Influential Persons (PIPs)

– Concern: Absence of private sector PIPs list will make implementation difficult

– Solution: Minister to delay effective date of the provisions relating to private sector PIPs until availability of list

• However, note Risk-Based system AND shortcomings of lists

• Exemptions to be considered for certain specific industries where justified

• Guidance will be issued by FIC/Supervisory Bodies, e.g. beneficial ownership

• Compliance costs will be continuously assessed and monitored with industry

• Parliament can request report back on progress of implementation

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al intelligence centre REPUBLIC OF SOUTH AFRICA

financial intelligence centre

REPUBLIC OF SOUTH AFRICA

CONTESTED POLICY ISSUES AND THEIR

RESOLUTION

Definitions

“Client” and “Prospective client”

• Concern: What constitutes a “client” may differ from one Accountable Institution (AI) to the

other

• Prescription on definition of client may result in unintended consequences in some

sectors such as attorney’s profession and casino industry

• Solution: The definition of ‘client’ remains, BUT ‘prospective client’ is removed from the Bill

and left to AI to determine in line with its Risk & Management Compliance Programme

(RMCP)

“Domestic prominent person” and “foreign prominent public

official” • Concern: A concern was raised around including a detailed list of persons under the

definitions

• Solution: Bill amended to remove list of persons from definition and move it to Schedules

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Record Keeping and Consultation

Record Keeping

• Concern: Previous draft required that records be kept in South Africa, to enable

easy and instant access by local authorities if required

• Solution: Bill deletes wording which requires that records be kept in South

Africa. Records can be kept anywhere, on condition that access is guaranteed

for authorities.

Consultation • Concern: Industry was concerned that it is not consulted sufficiently, generally

and on specific supervisory instruments

• Solution: Bill now introduces provisions very similar to those in Financial Sector Regulation Bill, requiring general consultation forum and consulting on specific regulatory instruments by the FIC and Minister

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Single Transaction and Beneficial ownership

Single transaction • Concern: Due diligence on single transactions onerous

• Solution: Bill amended to enable threshold for single transactions in line with FATF Standards, thereby reducing the extent of due diligence to be carried below threshold

Beneficial Ownership Concern: Industry preferred a threshold to be attached to share capital similar

to FATCA (10%), OECD common reporting standard and FATF (25%), as proxy for beneficial ownership

Solution: Agreed that Bill should not include a threshold in the definition.

Instead, the FIC and supervisory bodies will provide guidance with regard to determination of ‘effective control’, and threshold can be mentioned in the guidance note as one of the indicators

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Additional due diligence measures relating to legal persons, trusts and partnerships & RMCP

Additional due diligence measures Concern: Industry viewed Section 21B as very prescriptive and thus going against the

proposed risk-based approach

Industry read the entire section to mean they have to identify and verify both natural person owner and controller, thus not providing for the ‘cascading effect’

Solution: S21B reworded to cascade – i.e. first ascertain natural persons with controlling interest; if this fails, then ascertain natural persons who controls entity by other means; if this fails, then ascertain natural person who controls management of entity

Risk Management and Compliance Programme (RMCP) Concern: Industry concerned that S42 is too prescriptive on what the RMCP must

contain. Issue of risk-based versus rules-based approach.

Solution: Bill now introduces flexibility (i.e. S42(2A)) by enabling the AI to deviate from the prescribed minimum subject to explanation; “comply or explain principle”

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PIPs (South African) v PEPs (International) • Concern: Definition or list too broad and deviates from FATF International Standards,

and requirements for due diligence onerous; SA definition includes private sector PIPs

• Solution: Bill retains the broad definition which includes both persons in the public and private sector

FATF standards/recommendations require a legal framework which requires AIs to pay special attention to business relationships with Politically Exposed Persons

But note that public sector persons will also have private sector counterparts

List limited to prominent private sector persons doing business with State, AND of certain value

Provisions in relation to domestic and foreign PIPs apply only to business relationships and excludes single transactions

References to previous spouse/civil partner/life partner maintained

General comments

Concern around lack of private sector list acknowledged, and there are some developments around procurement to facilitate list (e.g. e-Tender portal)

Still important for Accountable Institutions (AIs) to use whatever means available in their disposal to obtain the relevant information from clients

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Closing remarks

• Important to reiterate

– Financial crime remains a concern

– SA regulatory framework must be updated to be in line with best practice

– Being deemed a PEP/PIP (SA version) does NOT mean you are guilty of financial crime AND does NOT mean you cannot transact with an AI

• All it means is that the AI must pay more attention on PEP/PIP in terms of how they use the AI’s services

• Broad South African approach to include private sector PIPs is justified, even though it raises some implementation challenges

• Principles behind the amendments are sound and in line with international standards, but we acknowledge we must find a reasonable way to implement

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THANK YOU

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